What will the tax system look like after the General Election?

How will the tax landscape change after the General Election? Irrespective of which of the three major parties (or which combination of the three major parties) forms the next government, their manifestos suggest that for most taxpayers life will continue much as before. Those who are more likely to see significant changes are those at the top and bottom of the income scale, and those involved with businesses targeted by the parties for special measures.

Personal tax

The personal allowance and income tax rates
The Conservatives and Lib Dems have committed to increase the income tax personal allowance to at least £12,500 by the end of the next parliament (from its current level of £10,600). The Labour Party has given no commitment on the personal allowance but will introduce a 10% starting rate.

The 20% and 40% rates will not increase, whoever is in power, but under Labour the 45% rate for income above £150,000 will rise to 50%.

Under the Conservatives the threshold for the 40% rate will rise to £50,000 (currently £42,385). The other two parties have made no commitment on thresholds; in particular, there is no indication at what level of income the Labour Party’s proposed 10% rate would apply.

All three parties have committed not to increase national insurance rates.

Pension contributions
Labour will restrict tax relief on pension contributions for ‘the highest earners’, and the Conservatives for those earning over £150,000 (which may, or may not, be the same thing). No further details are given. The Lib Dems will consider the case for a single rate of tax relief irrespective of the level of earnings, set higher than the basic rate of 20%.

'Non-doms'
The Labour Party will abolish the ‘non-dom’ regime under which individuals who are resident but not domiciled in the UK may elect to pay the ‘remittance basis charge’ such that they are taxed on their overseas income by reference only to the amounts remitted to the UK. The Lib Dems will restrict access to this relief and increase the charges (which the coalition has already done while in government). The Conservatives will ‘tackle abuses’ of this status.

The taxation of dividends
The Lib Dems propose reform of what they call ‘dividend tax relief’. Presumably this refers to the fact that dividends are currently taxed at a lower rate than other income, to reflect the fact that the profits distributed by way of dividend have already been taxed once in the hands of the company.

A bank bonus tax
The Labour Party will introduce a bank bonus tax. No details are given. This is in addition to Labour’s planned further increase in the bank levy (see below).

Inheritance tax
For inheritance tax the Conservatives will introduce a transferable main residence allowance of £175,000 per person. The intention is that, together with the existing transferable £325,000 nil-rate band, this will enable a couple to transfer a home worth £1 million tax-free.

A mansion tax
Both the Labour Party and the Lib Dems will introduce a ‘mansion tax’ (though, unsurprisingly, neither of them call it that) on residential properties worth over £2 million. Few details are available. The Lib Dems indicate that it will have a banded structure, like council tax. The Labour Party indicate that the £2 million threshold will rise in line with house prices, and that those on lower incomes will have a right to defer the charge until the property changes hands.

Corporation tax

The Conservatives want to maintain the most competitive tax regime (not merely the lowest tax rate) in the G20. The Labour Party will maintain the most competitive tax rate in the G7. The Lib Dems state, more cautiously, that ‘our plans do not require any increase in the headline rate … of … corporation tax’.

Comparisons with other jurisdictions are not straightforward, because in many countries tax is levied on companies at both a national and local level. In broad terms, the aspiration to have the most competitive regime in the G20 means that (barring changes elsewhere) the Conservatives must maintain (or reduce) the 20% rate that the UK shares with Russia (where 20% is the maximum combined federal and regional rate), and with Saudi Arabia and Turkey. The Labour commitment to have the lowest rate in the G7, by contrast, might give them scope to raise the rate to the same level as in Canada (where the combined federal and provincial rates vary between 20% and 31%).

The Lib Dems have indicated that they will ‘work to adjust the tax system away from subsidy of high leverage debt and tackle the bias against equity investment’. Any such changes could have a major effect on corporate financing decisions and seem to fail to take into account that although interest payable, unlike dividends, is normally tax-deductible, interest receivable is taxable, whereas dividends receivable by companies generally are not.

Other taxes

Levies on banks, tobacco companies and payday lenders
The Conservatives will continue the bank levy (which they have recently increased while in government). The Labour Party will increase it again, while the Lib Dems will continue it and introduce a ‘time-limited supplementary corporation tax charge’ on banks.

Both the Labour Party and the Lib Dems intend to introduce a levy on tobacco companies. The Labour Party will also impose a levy on payday lenders.

VAT
Both the Labour and the Conservative parties have committed not to increase the rate of VAT. The Lib Dems, again, indicate that their plans ‘do not require’ any change.

Business rates
All three parties propose to reduce the burden of business rates for small businesses. The Lib Dems remain committed to their long-held proposal to introduce a ‘land value tax’ to replace business rates in the longer term.

Tax evasion and tax avoidance
All three parties promise measures to counter tax evasion and avoidance, but in practice the coalition government has already taken extensive steps in this area. All three parties offer an estimate of the amount of tax to be gained in this way, but in reality these figures can be little more than conjecture.

Conclusions

A Labour-led government would probably result in the most significant changes – which is hardly surprising, given that the two other parties form the current government, and have already had the opportunity to set (or influence) tax policy.

Under Labour, individuals with income over £150,000 would see the 45% top rate of income tax increased to 50%. Some other income tax payers might perhaps see increases too, if the thresholds at which the 20% and 40% rates apply were varied. The 10% band would undoubtedly assist some lower-income taxpayers, as would the increases to the personal allowance proposed by the Conservatives and Lib Dems; it is impossible to say which would be more advantageous without knowing the band to which the 10% rate would apply.

Labour’s manifesto also leaves scope for significant increases in corporation tax, but it does not include any commitment that such changes will necessarily be made.

All the parties have to a large extent tied their hands by commitments about not increasing the 20% and 40% rates of income tax that apply to the vast majority of taxpayers, nor the national insurance or VAT rates. For the Conservative Party this is less of an issue. Their manifesto commits them to cutting taxes, so they are under no obligation to explain where additional taxes will come from. For the Labour Party and the Lib Dems, the alternative to increasing the basic and higher rates (or the VAT rate) is to explore new sources of tax revenue – the ‘mansion tax’, the bank bonus tax, and levies on banks, tobacco companies and payday lenders.